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Sunday, June 3, 2012

The Bare Minimum: DOC Announces Double Counting "Fix"

When Congress passed legislation in March to apply countervailing duties on imports from China and other countries deemed "non-market economies" under the US anti-dumping law, proponents like House Ways & Means Committee staff promised us that the bill would solve, once and for all, the problem of "double counting," and that we critics were peddling "myths" when we claimed that the law in no way ensured that the illegal practice would end. The CVD/NME law's "solution" to the double counting problem appeared to be tying the US Commerce Department - tasked with implementing the new law - in knots as it tried to complete its "Section 129" determination to bring the four AD/CVD determinations ruled illegal by the WTO Appellate Body (because of double counting and a few other issues) into compliance. Well, last Thursday Commerce finally announced its preliminary work on double counting as part of the Section 129 process, and I think it's pretty safe to say that the double counting saga is nowhere near over, despite what much of Congress and the Obama administration would have you believe.

As you may recall, "double counting" occurs when duties intended to offset a subsidy on an imported NME product are imposed twice on that product as a result of concurrent AD/CVD investigations - a practice ruled illegal by both the US Court of International Trade and the WTO Appellate Body. Because the NME methodology in anti-dumping cases already offsets any and all subsidies received by a Chinese exporter, duties resulting from a CVD (anti-subsidy) investigation of the same product inevitably offset the same subsidies twice - a punitive result that is inconsistent with WTO rules and US law. So when the WTO Appellate Body ruled that four AD/CVD investigations violated WTO rules because, among other things, Commerce failed to account for double-counting, the US government set out - albeit glacially - to bring the decisions into conformity.

Commerce's preliminary attempts to follow the Appellate Body's double counting ruling are available here, here, here and here. The memos are very long and very boring, but a quick skim reveals that they're pretty much identical, except for a few details about each case. Being the nice guy I am, I'll save you the time of reading through the memos, and have pasted the crux of the Department's new double counting "solution" below (emphasis mine):

Given the variable cost-(short-run) price link noted in the Report, the Department considered
evidence from the record of the original AD and CVD investigations and found that for the sacks
industry, purchases of petrochemicals were booked in the direct raw materials inventory at the
cost of acquisition. Since direct raw materials constitute a variable cost of production, the
record in this proceeding – which includes the Report and evidence from the original
investigations – indicates a subsidy-(variable) cost-price link in the case of input price subsidies.
The Department, however, has found no other evidence on the record of the investigations with
respect to other subsidies and the cost categories that they may impact. Therefore, for the
purposes of this 129 proceeding, estimation of the extent that domestic subsidies to producers in
China resulted in lower export prices, i.e. the extent of subsidy pass-through, has been limited to
subsidies that are likely to have impacted variable cost, and the extent of cost pass-through has
been used as a proxy for the extent of subsidy pass-through.

In order to estimate the extent to which changes in such variable costs were reflected in prices
during the POI, as described in the Report, the Department calculated the average ratio of (a)
rolling, monthly, year-on-year changes in production input costs to (b) rolling, monthly, year-onyear
changes in ex-factory prices, for the POI, using data for the manufacturing sector in China
available through Bloomberg’s electronic terminal. As a proxy for the change in input production costs, the Department used changes in an aggregate production input price index.
And as proxy for changes in ex-factory prices, the Department used changes in an aggregate
producer price index for the manufacturing sector in China. This ratio of price-cost changes
(herein referred to as the Ratio Change Test (RCT)) estimates the extent of price responsiveness
during the POI to changes in variable cost for producers in China.

We recognize that the extent of input price inflation pass-through is an inexact proxy for the
extent of subsidy pass-through, not only because input price inflation and subsidies push cost in
opposite directions, but because the impact of input price inflation may be more uniform and
systemic in nature. As indicated above, the Department’s administration of the new statutory
provision may evolve with the benefit of time and experience. The Department therefore intends
in future inquiries, where appropriate and where time permits, to reassess this analytical
approach, if merited....

The above-described approach leads us to conclude that approximately 63.07 percent of the
value of the subsidies that have impacted variable costs, as identified above, were “passed
through” to export prices for the sacks industry during the POI.

To summarize: of all of the countervailable subsidies received by the Chinese exporters under investigation - like low-cost loans or cheap land or tax breaks or simple monetary grants - Commerce determined that it will limit its double counting "fix" to a single type of subsidy: input subsidies (e.g., cheap, government-provided steel used by targeted Chinese exporters). And, for those input subsidies, Commerce will only reduce the total subsidy rate by 63.07 percent - a value not based on the actual records of an investigated Chinese exporter (e.g., a steel pipe producer) or even the actual industry at issue (e.g., all Chinese steel pipe producers), but instead on general numbers for the entire Chinese manufacturing sector and all industrial inputs pulled from a Bloomberg terminal.

In short, even though Commerce's NME methodology offsets any and all subsidies received by a Chinese exporter, the agency's double counting "solution" addresses only one kind of subsidy, and only offsets a fraction of it. And that fraction has almost nothing to do with the the actual subsidies, production costs or final prices of the Chinese exporters under investigation.

But other than that...

If you're still confused, I don't blame you, so here's a very simple example. Let's say Chinese Exporter X participated in AD and CVD investigations of its widgets and originally received a 25% AD duty rate and a 25% CVD rate and, thus, a 50% combined duty on all of X's widget imports into the United States (without any double counting fix). The CVD rate for X's widgets is the result of the exporter's receipt of five different subsidies, each adding five percentage points to the total CVD rate but only one of which is an input subsidy. Under such circumstances, Commerce's new "double counting" methodology would address only a fraction of the one input subsidy and would thereby reduce X's 25% CVD rate by a whopping 3.15% (63% of 5%). Thus, Commerce's big double counting solution would cause the total duty applied to X's imports to drop from 50% to... about 47%. (And, of course, where the input subsidy represents a far smaller share of the total CVD rate - say, 1% of 25% - that glorious reduction would be even smaller.)

Some solution, huh?

On the bright side, I guess things could've been worse: as I noted in March, the CVD/NME law was so poorly loosely-worded that Commerce probably could've done nothing to exporters' final AD/CVD rates and still complied with the letter of the law. So at least this is a start (I guess). Moreover, it's clear from the penultimate paragraph quoted above that not even Commerce is too comfortable with its "inexact" methodology, so maybe after a few years, it will have "evolved" to address a tiny bit more of the total, actual instances of double counting. (Dare to dream.)

In the meantime, however, it seems quite likely that the WTO won't be waiting around for Commerce's evolution, and instead will assess this first attempt because I highly doubt that this "inexact" fraction-of-a-fraction methodology is going to satisfy the Chinese government, its exporters or US importers. I honestly have no idea how that ruling will come out, given the Appellate Body's standard and Commerce's near-term solution. But one thing continues to be crystal clear: because the US government refused to take one of several simpler solutions to the whole CVD/NME mess, we have more litigation - and uncertainty - to look forward to.